The document discusses Takaful, an Islamic alternative to conventional insurance, emphasizing its Shari'ah compliance and risk mitigation principles. It outlines the evolution of Takaful following the development of Islamic banking, its operational models, and the mechanisms for managing funds and surpluses. The paper highlights key differences between Takaful and conventional insurance, including risk sharing instead of risk transfer and the management of funds according to Shari'ah guidelines.

1. PERVAIZ AHMED
INTERNATIONAL ISLAMIC
1st March, 2014, Qatar
T A K A F U L
Shari’ahCompliantAlternative
to Conventional Insurance

2. Flow of Presentation
 Risk Mitigation from Shari’ah Perspective
 Global development of Takaful
 How does Takaful Function?

4. Risk Mitigation from Shari’ah Perspective
Is the concept of risk mitigation permissible in Islam?
• This very concept is not only lawful/permissible in Islam but is in fact
encouraged
What are the available risk mitigation tools?
• A concept misunderstood as against Tawakul..
Avoid using Risk Mitigation
Tools
• Funds may not be sufficient to compensate the
loss
Self-Insurance or setting aside
contingency money for the
rainy day
• A commercially viable system but contains the
element of Riba, Gharar, and Qimar/Maysir
Conventional Insurance
• A commercially viable system which is also
Shariah Compliant
Takaful

5. Risk Mitigation in Islam
Islamic history is replete with examples featuring
risk mitigation activities:
Hadith:
“Tie the Camel
and then Submit
to the Will of
Allah”
Dhaman
Khatr al-
Tareeq:
A person would
undertake another
person’s risks
without any
consideration/fee
in return
Dhaman Al-
d’ark:
A person would
influence a sale by
promising to
compensate for
the loss if the
subject-matter
proved faulty
Aqila:
A risk sharing
mechanism in
which community
members pooled
their share of Diyat
(blood money)

6. Shari’ah Ruling on Conventional Insurance
Concept of
Insurance?
Content of
Insurance?
?
Shari’ah has no objections as to the concept or objectives
of insurance ; it only has reservations with the way it is
carried out i.e. the process of insurance

7. What is Allowed?
 Risk Transfer without Consideration (premium)
 Risk Sharing between Participants
 Basis of Contract: Taburru i.e. unilateral non-commutative
 Takaful Operator has no ownership claim on the contributions
(premiums) paid by the participants
 The Participants lose ownerships rights once the contribution is
paid on the basis of Taburru
 The contribution becomes the property of the Pool (Waqf)
What is not Allowed?
 Risk Transfer Against Fixed Consideration (premiums)
 Basis of Contract: Muawaza i.e. bi-lateral sales & purchase
 Reason: Such a contract involves Riba, Gharar, & Qimar/Maysir

9. Origin of Modern Takaful
 Western socio-economic, political, and legal orders overshadowed Islamic and
traditional local norms
 Muslim Revival and Renaissance began around the 1920s on multiple fronts
 As a result, development of Islamic Banking started in 1970s
 Dubai Islamic Bank, the first commercial Islamic bank, was established in 1975
 There was a legal requirement that Islamic banks’ underlying assets be insured
e.g. Car Ijarah
 Islamic banks could not avail insurance from conventional companies as that
would be antithetical to the cause
 The need for a practical risk mitigation mechanism grew as the Islamic banking
industry grew
 First Takaful company was established in Sudan in 1979, four years after the
establishment of the first Islamic bank

10. Need for Takaful was felt after the development of
Islamic Banking
1975
First Islamic Bank
1979
First Takaful Co.

11. Development of Takaful Industry

12. (USD) BILLON
187
# of Takaful
Operators in
2012
Approx.
48
Window
Operators
15
Irani
Operators
>18
Re-Takaful
Operators Global Market Size of Takaful
Source E&Y Report 2013
Worldwide Takaful Developments & Growth
4.2
5.4
7.1
8.3
9.4
10.9
0
2
4
6
8
10
12
2007 2008 2009 2010 2011 2012

13. Geographical Distribution of Takaful Volumes
51%
25%
16%
2%
5%
1%
Saudi Arabia
ASEAN
GCC
South Asia
Africa
Levant
Source E&Y Report 2013

15. Takaful Arrangements can be broadly
divided into the following two categories:
Family Takaful covers
All risks associated with human life, like
- death,
- disability and illness
- short-term and long-term investment needs
General Takaful covers
All risks associated with Physical Assets and Property, like
- house,
- marine,
- motor,
- engineering and misc.

16. Three Operational Models
Pure Mudarbah Practiced earlier, it is no longer in use.
Pure Wakalah This model in not widely practiced.
Hybrid –
Wakalah +
Mudarbah
This is the most prevalent model.
Hybrid-
Wakalah+
Mudarbah+
Waqf
This model was suggested by Shari’ah
Scholars in Pakistan.

17. How does it Function?
Wakala
h Wakala
h
Wakalah
Wakalah
Takaful
Operator
Investment Participant
Participant
Participant
Participant
Participant
Pool
Risk sharing
Between
Participants
Wakalah
Wakalah
Surplus
Wakalah Fee, Claims, Re-Takaful

18. Participant’s
Investment
Account (PIA)
Waqf Fund
Operator /
Wakeel
Participant
Contributions
Profits from Investment Wakalee Fee(s)
for Investment
Management
Contributions for
Takaful Benefit
Payment of
Claims
Surplus
Distribution (if
any)
Wakala Fee for
Operating Waqf
Fund
1
23
4
5
6
7
How does it Function? Family Takaful

19. Takaful Funds
• Income and
expenses of
Shareholder’s are
managed
Shareholder’s
Fund
• Income and
expenses of
Tabarru/Waqf pool
are managed
Participant
Takaful Fund
• Investments of
Participants are
managed. This
fund is Only
required in Family
Takaful companies
Participant
Investment
Fund

20. Participant Takaful Fund (PTF) - Income
Income of PTF consists of following
 Contributions received from the participants (other than the
portion transferred to PIA under Family Takaful Policies)
 Claims amount and commission received from the Re-Takaful
operators
 Investment profit attributable to participants in the PTF
 Salvage/Recoveries
 Qard-e-Hasna by the shareholder fund in case of a deficit
 Any donation made by shareholders

21. Participant Takaful Fund (PTF)- Outgo
The outgo of PTF shall consists of the following
 Settlement of losses and expenses occurred therein
 Re-Takaful cost
 Takaful Operator’s fee – Wakalah fee
 Share of investment profits of PTF as Mudarib
 Surplus distributed to participants
 Return of Qard-e-Hasna to the shareholder’s fund

22. Shareholder’s Fund (SHF)
 Both, Family and General Takaful Companies will be maintained in
a similar way under the guidelines of Shari’ah Board and Central
Shari’ah Board.
 The SHF will consist of :
 the paid-up capital and
 undistributed profits to the shareholders.
 The income of the shareholder’s fund will consist of:
 Takaful Operator’s Fee (Wakalah Fee)
 Profit on the investment of the SHF and proportion of the
investment profit generated by the investment of PTF as per PTF
rules and the PMD.

23. Shareholder’s Fund (SHF)
 Expenses of shareholder’s fund shall consist of:
 All expenses related to Takaful Operator, including all
marketing as well as administrative investment and operational
expenses including commission and over riders paid to business
intermediaries, benefit payments and related expenses as
surveyors’ fee
 The Shareholder must undertake to declare unconditionally all
contracted liabilities of the PTF, but their liability in this regard shall
not exceed the SHF

24. Participant Investment Account (PIA)
 This account is maintained in Family Takaful companies where unit
linking policies are offered to the customers.
 Following are the investment avenues allowed by the Shari’ah
 Shari’ah compliant Government Securities
 Immoveable property
 Joint Stock Companies
 Redeemable Capital
 Mutual Funds
 Musharaka Certificates, Term Finance Certificates, Participation
Term Certificates
 Placement of excess funds with Banks and Islamic financial
institutions

25. Surplus Distribution
 After deducting the Wakalah Fees, Claims, Re-Takaful
Contributions, Contingency Reserves and Charities etc. the
remaining amount in the pool is to be distributed between the
participants; it does not go to the shareholders
 Surplus distribution is one of the major USP of Takaful, It
differentiates between a very well managed company from a
poorly managed company.
 For example QIIC which is a better managed company is
distributing surplus of 20% since last many year as opposed to
many other companies who are not distributing surplus at all.

26. Conventional Insurance Vs. Takaful
Conventional Insurance Takaful
 Insurance is a compensatory
contract
 Takaful is a non-compensatory
contract
 Risk Transfer  Risk Sharing
 Insurer is the owner of all the funds
and have all the rights
 Operator is just the manager of the
fund and has limited rights
 Underwriting Surplus of the fund is
owned by the insurer
 Surplus belong to the participants
and distributed amongst them
 No restriction on the management
of investments
 Investments are managed
according to the guidelines given
by Shariah

27. Jazaakum Allahu Khairan
Pervais.Ahmed@qiib.com.qa
www.qiib.com.qa